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Those Smart Bond Traders

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There seems to be a consensus that bond traders are smarter than stock traders.  Consider this thought from Investopedia’s Financial Edge website:

Many investors believe bond traders understand the economy better than equity traders.  Bond traders pay very close attention to any economic factor that might affect interest rates.  Equity traders recognize that changes in bond prices provide a good indication of what bond traders think of the economy.

Widespread belief that Ben Bernanke’s Zero Interest Rate Policy (ZIRP) has created a stock market “bubble” has led to fear that the bubble may soon pop and cause the market to crash.  It was strange to see that subject discussed by John Melloy at CNBC, given the news outlet’s reputation for stock market cheerleading. Nevertheless, Mr. Melloy recently presented us with some ominous information:

The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”

In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening.  That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.

*   *   *

The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders.  They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.

*   *   *

Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains.  Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation.  Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com.  Yet the fear of a crash persists.

Whether or not one is concerned about the possibility of a market crash, consensual ambivalence toward equities is on the rise.  Felix Salmon recently wrote an article for The New York Times entitled, “Wall Street’s Dead End”, which began with the observation that the number of companies listed on the major domestic exchanges peaked in 1997 and has been declining ever since.  Mr. Salmon discussed the recent trend toward private financing of corporations, as opposed to the tradition of raising capital by offering shares for sale on the stock exchanges:

Only the biggest and oldest companies are happy being listed on public markets today.  As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy.  To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.

At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years.  Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check.  With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.

Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns.  The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.

Investors who decided to keep their money in bonds, heard some discouraging news from bond guru Bill Gross of PIMCO on February 2.   Gus Lubin of The Business Insider provided a good summary of what Bill Gross had to say:

His latest investment letter identifies four scenarios in which bondholders would get burned.  Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.

In other words, you can’t win.  Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut:  “This is not God’s work – it has the unmistakable odor of Mammon.”

Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.

I was particularly impressed with what Bill Gross had to say about the necessary steps for making America more competitive in the global marketplace:

We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again.  We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship.  We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up.  America requires more than a makeover or a facelift.  It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.  It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.  Are record corporate profits a fair price for America’s soul?  A devil’s bargain more than likely.

You can’t discuss bond fund managers these days, without mentioning Jeffrey Gundlach, who recently founded DoubleLine Capital.  Jonathan Laing of Barron’s wrote a great article about Gundlach entitled “The King of Bonds”.  When I reached the third paragraph of that piece, I had to re-read this startling fact:

His DoubleLine Total Return Bond Fund (DBLTX), with $4.5 billion of assets as of Jan. 31, outperformed every one of the 91 bond funds in the Morningstar intermediate-bond-fund universe in 2010, despite launching only in April.  It notched a total return of 16.6%, compared with returns of 8.36% for the giant Pimco Total Return Fund (PTTAX), run by the redoubtable Bill Gross  . . .

The essay described how Gundlach’s former employer, TCW, feared that Gundlach was planning to leave the firm.  Accordingly, TCW made a pre-emptive strike and fired Gundlach.  From there, the story gets more interesting:

Five weeks after Gundlach’s dismissal, TCW sued the manager, four subordinates and DoubleLine for allegedly stealing trade secrets, including client lists, transaction information and proprietary security-valuation systems.  The suit also charged that a search of Gundlach’s offices had turned up a trove of porn magazines, X-rated DVDs and sexual devices, as well as marijuana.

*    *    *

He charges TCW with employing “smear tactics … to destroy our business.” As for “the sex tapes and such,” he says, they represented “a closed chapter in my life.”

That’s certainly easy to understand.  Porn just hasn’t been the same since Ginger Lynn retired.

Jeff Gundlach’s December webcast entitled, “Independence Day” can be found here.  Take a good look at the graph on page 16:  “Top 0.1% Income Earners Share of Total Income”.  It’s just one of many reminders that our country is headed in the wrong direction.


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The Stupid War Against The Stimulus

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February 23, 2009

We keep hearing rants against President Obama’s economic stimulus bill.  The final version of the bill was passed by both the House of Representatives and the Senate on February 13.  On February 17, it was signed into law by our new President.  It is now called the American Recovery and Reinvestment Act of 2009.  Nevertheless, there are people out there (nearly all of them Republicans) fuming about the stimulus bill, despite the fact that the debate is now over.  The bill has already gone into effect.  So what’s the point?  Many commentators feel that currently, there is fierce competition to stand out as the new leader of the Republican Party.  Louisiana Governor Bobby Jindal apparently believes he can advance his career by complaining about the stimulus and refusing to accept money allocated under the stimulus bill to expand eligibility for unemployment compensation because it would increase taxes on employers.  As Robert Pear and J. David Goodman reported for The New York Times, Mississippi Governor Haley Barbour said that he, too, would reject the money for expanding unemployment insurance:

“There is some we will not take in Mississippi,” Governor Barbour told CNN’s “State of the Union” on Sunday.  “We want more jobs.  You don’t get more jobs by putting an extra tax on creating jobs.”

The article noted that California Governor Arnold Schwarzenegger (also a Republican) would be happy to take any money from the stimulus bill that had been rejected by any other governor.

The hostility against the stimulus just doesn’t make sense.  A few Republicans may think they might look like heroes to the traditional Republican “base” right now, but as the stimulus plan begins to bear fruit, they are going to look like fools.

Tom Friedman discussed one intriguing conversation he had with a true American capitalist (the sort of voter Republicans always have taken for granted) in the February 21 New York Times:

The wind and solar industries in America “were dead in the fourth quarter,” said John Woolard, chief executive of BrightSource Energy, which builds and operates cutting-edge solar-thermal plants in the Mojave Desert.  Almost five gigawatts of new solar-thermal projects — the equivalent of five big nuclear plants — at various stages of permitting were being held up because of a lack of financing.

“All of these projects will now go ahead,” said Woolard.  “You are talking about thousands of jobs  …  We really got something right in this legislation.”

These jobs will be in engineering, constructing and operating huge solar systems and wind farms and manufacturing new photovoltaics.  Together they will drive innovation in all these areas — and move wind and solar technology down the cost-volume learning curve so they can compete against fossil fuels and become export industries at the “ChinIndia price,” that is the price at which they can scale in China and India.

Mr. Wollard “gets it” but the usual Republican spokesmen don’t.  As Jonathan Alter points out in the March 2 edition of Newsweek:

Columnist Charles Krauthammer called the $787 billion stimulus package “a legislative abomination,” and Karl Rove wrote that “the more Americans learn about the bill, the less they like it.”

Polls say otherwise.  The public likes the signs of action, respects that the new president is willing to admit error and appreciates his constant reminders that there are no easy cures to what ails us.

*   *   *

The GOP did a good job trivializing the stimulus, but Obama may have the last laugh.  The package is so big, and stretches across so many states, that it provides him at least four years of photo ops as Daddy O on tour, bringing home the jobs right in your local media market.  It was hardly a coincidence that video of bridge repair in Missouri began airing only moments after the president signed the bill.

As Walter Alarkon explained in his February 21 posting on The Hill website, there is a split among Republican governors as to whether the party’s next leader will be a centrist or a traditional conservative.  As his piece demonstrated, there are some Republicans who “get it”:

One possible White House hopeful, Utah Gov. Jon Huntsman Jr. (R), wouldn’t criticize the stimulus despite his red state bona fides.  He said that the federal money would fund infrastructure projects that could help the Beehive State’s economy.

“You have to have a party that is results oriented, that actually develops solutions to some of our nagging problems of today,” he said.

He said that Republicans who turn to “gratuitous rhetoric” will continue to lose.

Another Republican who “gets it” is Florida Governor Charlie Crist.  During his February 22 appearance on NBC’s Meet The Press, David Gregory asked Governor Crist whether he thought it was a mistake for the Republican Party to define itself by opposition to the stimulus.  Governor Crist gave this response:

Well, it may be.  All I know is I have to do what I think is in the best interest of the people of Florida.  And from my perspective, it’s to try and help them.  Help them every single day in every way that I can in education, in infrastructure, in health care; do the kinds of things that keep us from having to raise taxes.  You know, another part that people don’t talk about in the stimulus bill is that it cuts taxes.  About a third of it cuts taxes.   . . .   At the same time, because of the stimulus we’ll be able to pay our teachers more next year than we were this past year.  So I think it works, it works well, it helps people, it does what’s right.

How does one argue with that?  The current moot debate over the stimulus bill simply underscores one of the reasons why the Republicans suffered such huge losses in 2006 and 2008.  They need to abandon the failed strategy of focusing on the preferences of their so-called “base” and start representing the rest of America.  If they don’t learn this lesson, they will never win a majority in the Senate or the House and they will have to abandon their dreams of another Republican President.